Monetary Policy

Answer the following questions as completely as possible using graphs, where necessary to support your
explanations.

1. Name and describe each of the three monetary policy tools the Federal Reserve uses to control the
money supply. For each tool, explain specifically how it is used to raise and lower the money supply
and how this determines the equilibrium interest rate.

2. Explain how changes in interest rates impact the investment portion of GDP and the subsequent
impact of changes that higher and lower investment spending will have on AD and overall price level.

3. Explain the goals of monetary policy in regards to the business cycle of the macroeconomy. For each
phase of the business cycle; contractionary and expansionary, explain why the Federal Reserve would
either raise or lower the money supply to achieve a specific economic goal.